Gold Futures and Options
Individuals who are interested in trading gold are making a good choice, particularly in these troubled economic times: Gold typically holds its value, and gold-trading platforms (particularly online gold-trading platforms) have proliferated in recent years, making it easier than ever to trade gold. But before you get started, you will need to understand the ways in which you can trade gold.
First, you can trade gold on the world’s stock exchanges in the form of securities that are generally referred to as
exchange-traded funds (ETFs). Many gold ETFs are backed 100% by physical gold (such as bars and bullion),
and are designed to track the gold price almost perfectly.
A vastly more popular way to trade gold, however, is to use gold futures and options. A gold future is a firm commitment to deliver, or take delivery of, a specific quantity of gold on a specific date at a specific price. Similarly, gold options give you the right to deliver, or take delivery of, a specific quantity of gold on a specific date at a specific price—but not the obligation.
With both gold futures and gold options, you make an initial deposit—which amounts to a fraction of the underlying gold’s price—to buy the futures or options. Instead of delivering or taking delivery of the gold, however, you sell the contract, ideally for a profit.
Note that these vehicles are used by speculators to make money on swings in the price of gold. But they can also help hedge, or minimize, risk. For example, gold options are often used by gold traders to hedge against a rise or fall in the price of gold. To illustrate, let’s say you purchased gold at $800 an ounce and are worried it will fall in value. By paying a relatively small fee, you can obtain the option to sell that gold at, say, $750 per ounce. That way your loss is limited to $50 per ounce—and it only cost you a fraction of the price of the gold itself.
Gold futures contracts and gold options contracts are traded on regulated commodities exchanges, the largest of which are the CME Globex (previously the New York Mercantile Exchange Comex Division), the Chicago Board of Trade and the Tokyo Commodity Exchange.
Finally, note that in addition to trading gold with futures and options, you can trade so-called spot gold, which lets you take a long or short position in gold while simultaneously taking the opposite position in the U.S. dollar (much like trading forex pairs). We’ll talk about trading spot gold more in another article.